ETH and BTC Not Securities: Where's the Surge?

The recent decision by the Securities and Exchange Commission to not classify bitcoin and ethereum as securities was expected to spark higher crypto prices, and it did — for a short while. Despite the price spike of major coins, the market largely absorbed the shock of the announcement and reverted to the same levels the cryptocurrencies have been hovering around for several weeks now.

The short bounce raised important questions about the market, namely why the bull market that many expected failed to materialize. After prices reverted to the recent range, it became clear that the announcement was not as uplifting as expected, and it did little to solve many of the problems that remain endemic to the crypto market.

For one, while bitcoin and etherem were finally categorized, the rest of the cryptocurrency market is stuck in a gray area in regard to regulation. Moreover, the decision, while positive for some institutional investors, did little to sway the opinion of the institutional sector.  All in all, these factors combined to put pressure on BTC and ETH prices and there is little certainty that they will be removed soon, further dampening optimism about a potential bull market resumption.

A Short, But Unsustainable Spike

ETH and BTC prices did indeed surge following the SEC’s announcement, with ETH rising by as much as 11% in value, and BTC jumping 5% higher. However, ETH soon fell back down, and though it has recovered since then, it is far from the bull market many anticipated. Neither coin has been able to reclaim the highs they achieved toward the end of 2017. This failure to launch has puzzled many crypto bulls who foresaw a massive influx of cash once the SEC’s potentially crippling classification was taken off the table.

Classifying BTC, ETH, and other cryptocurrencies as securities means that they would be subject to significantly stricter regulations than they are now, when they’re technically considered commodities. Securities, as defined by the Howey Test, are subject to strict disclosure and filing laws which would drastically change the way cryptocurrency transactions and trading must operate. While the debate as to whether bitcoin, ethereum, and other coins meet the Howey Test’s bar remains controversial, the SEC’s decision was expected to unleash bitcoin’s price. By removing the regulatory hurdles securitization would imply, the market was supposed to explode.

Prices Remain Chained

Nevertheless, BTC and ETH prices have remained relatively flat after the massive drop off to start the year. Outside of the SEC price bump, there are still factors affecting how sustainable any growth in prices can be. One of the biggest predictions industry observers and crypto enthusiasts have consistently made is the arrival of institutional money, which would represent a potentially massive injection of liquidity into the market.

Losing the security classification means that cryptocurrencies will remain too unregulated for many risk-averse funds’ tastes, restricting how much they will participate in the market. Additionally, major financial institutions continue to be staunchly anti-crypto. This manifests in difficulties for traders, from bans on credit card usage for crypto, and more. While recent indications have been that the overall attitude from the SEC is positive toward crypto markets, there is little progress expected over the short term, and it is likely to prove piecemeal at very best.

Another major issue holding back cryptocurrencies is the market itself. Due to the way bitcoin and other cryptocurrencies have expanded, large numbers of coins tend to be concentrated in a few wallets, or consortiums can collude to manipulate prices in a largely unregulated ecosystem.

Yaniv Altshuler, CEO and Founder of the AI-powered predictive analytics platform Endor claims that the company has "analyzed the blockchain activity in the weeks prior to this announcement and have detected the formation of several structures - each comprising dozens of thousands of wallets. These formations are seemingly decentralized yet display highly correlated behavior. In the days before the announcement took place, we observed that these entities started accumulating large amounts of ETH and BTC. We suspect that this implies the existence of a prior information that was know to whoever operated these large collection of wallets. This behavior acted in part as a "cushion", creating early demand before the announcement, and absorbing some of the demand that was created following it, by releasing tokens back to the market."

These “operators” hold significant influence and have been suspected to manipulate and distort prices for their own benefit.

There are also questions about the SEC decision’s broader impact. While the announcement focused on BTC and ETH, there was little mention of the other nearly 1,600 cryptocurrencies. This leaves these coins in a state of limbo, and most institutional investors reluctant to expose themselves significantly to the asset class only to face regulatory and compliance costs down the road.

Crypto Failure to Launch

Despite the hype surrounding the SEC’s classification decision, the reality is that cryptocurrencies are not likely to see another frenzy akin to 2017’s price action over the short term. Prices have remained largely steady, but they haven’t been able to sustain a prolonged rally in months. Even with the regulatory handcuffs removed, the market must confront the problems that have held it back until now. It is unlikely institutional investors will remain on the sidelines indefinitely, as regulators will eventually clarify their position further. Until then, cryptos remain bound by their own structures. Despite the decentralization they provide, the accumulation of wealth in a few wallets will remain problematic. In the meantime, the quicker fix would be for the market to reach a critical mass of users, a development which may very well manifest itself sooner than later.  

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